Question 1

_____ 3. S corporations have an incentive to pay unusually low salaries to an employee-shareholder to avoid FICA taxes.

Accepted Answer

S corporations can avoid paying FICA taxes on a portion of their income by classifying it as income from distributions to shareholders rather than salary. Therefore, there is an incentive for S corporations to pay low salaries to their employee-shareholders to reduce FICA tax liability.

Question 2

_____ 10. If an employer insists that an employee move from New York to California, all direct and indirect costs incurred by the taxpayer and paid by the employer would result in no income to the employee.

Accepted Answer

The statement is not true. The indirect costs incurred by the taxpayer and paid by the employer, such as moving expenses and transportation costs, are considered taxable income to the employee.

Question 3

_____ 6. All employee fringe benefits are tax free

Accepted Answer

Not all employee fringe benefits are tax free, it depends on the specific benefit and the laws and regulations of the country and state. Some benefits may be exempt from taxes, while others may be taxed as income or subject to certain limitations or regulations.

Question 4

_____ 7. If a health plan is self-insured, highly-compensated employees are not affected by the nondiscrimination rules.

Accepted Answer

Highly-compensated employees in a self-insured health plan must still adhere to nondiscrimination rules. All employees must be treated equally under the plan.

Question 5

_____ 20. A U. S. citizen working in a foreign country with a higher tax rate on income than the U. S. tax rate, is usually better off claiming the foreign tax credit than the foreign earned income exclusion.

Accepted Answer

Claiming the foreign tax credit allows the taxpayer to offset their U.S. tax liability with the taxes paid to the foreign country, which can result in a lower overall tax burden. The foreign earned income exclusion only excludes a certain amount of income from U.S. taxation and may not be as beneficial in cases where the foreign tax rate is higher.

Question 6

____ 17. Self-employed individuals make the deposits to their self-employment taxes in the months of April, July, September, and January.

Accepted Answer

The answer of ____ 17. Self-employed individuals make the deposits...

Question 7

_____ 4. A sole proprietor never has to pay employment taxes on income earned by any of his or her children who work for the business.

Accepted Answer

A sole proprietor may still have to pay employment taxes on income earned by their children who work for the business if certain requirements are met, such as if the child is over 18 and not a dependent for tax purposes.

Question 8

_____ 14. In a defined benefit retirement plan, the employer bears the financial risk for the plan investments.

Accepted Answer

In a defined benefit retirement plan, the employer guarantees a specific retirement benefit to the employee, regardless of the investment performance of the plan. As a result, the employer bears the financial risk for the plan investments.

Question 9

_____ 11. An employee who receives an incentive stock option normally recognizes no income until the stock acquired with the option is sold.

Accepted Answer

When an employee receives an incentive stock option, they do not recognize any income until the stock acquired with the option is sold. This is because the taxability of an incentive stock option is deferred until the sale of the underlying stock.

Question 10

_____ 8. As long as the plan is nondiscriminatory, any life insurance provided employees as a fringe benefit is tax-exempt.

Accepted Answer

Life insurance provided as a fringe benefit is generally taxable to the employee, except for the first $50,000 of coverage, which is tax-exempt if the plan is nondiscriminatory.

Question 11

_____ 15. A single employee who is not covered by an employer's retirement plan may always contribute at least $5,000 of earned income to his or her IRA.

Accepted Answer

This statement is true. An individual who is not covered by an employer's retirement plan may contribute up to $5,000 of earned income to his or her IRA. However, there are age limits and income limits on these contributions. As of 2021, individuals age 50 and older may contribute an additional $1,000 as a catch-up contribution, for a total contribution limit of $6,000.

Question 12

_____ 5. A rational taxpayer in the 25% tax bracket who wants health insurance would prefer the employer pay the $5,000 premium for this health insurance rather than receive a $5,000 increase in salary to purchase health insurance on his own.

Accepted Answer

This is because if the employer pays the premium, it is not considered part of the employee's taxable income, but if the employee receives it as salary, it will be subject to taxes. Therefore, paying the premium directly through the employer is more tax-efficient for the employee.

Question 13

_____ 13. Stock appreciation rights allow an employee to benefit from an increase in the value of the employer's stock without actually purchasing the stock.

Accepted Answer

Stock appreciation rights (SARs) are a form of equity compensation in which an employee receives a payment equal to the appreciation in the employer's stock over a set period of time, without actually owning the stock. This allows the employee to benefit from the increase in stock price without having to purchase the stock themselves.

Question 14

_____ 18. A taxpayer must work out of the country for a complete tax year, or he or she will not be eligible for the foreign earned income exclusion.

Accepted Answer

A taxpayer does not necessarily have to work out of the country for a complete tax year to be eligible for the foreign earned income exclusion. The taxpayer must meet either the bona fide residence test or the physical presence test to qualify for the exclusion.

Question 15

_____ 16. The Rabbi trust is a type of qualified retirement plan.

Accepted Answer

The Rabbi trust is a type of non-qualified deferred compensation plan and not a qualified retirement plan.

Question 16

_____ 19. A person who qualifies for the foreign earned income exclusion can exclude $16,336 of paid housing costs from income.

Accepted Answer

The foreign earned income exclusion allows for the exclusion of a certain amount of foreign earned income and housing costs, but the specific amount for housing exclusion varies based on location and is subject to IRS limits, not a fixed $16,336.

Question 17

_____ 9. An employee holiday party would be a tax-exempt de minimis fringe benefit.

Accepted Answer

According to IRS regulations, occasional parties or picnics for employees, such as holiday parties, are considered tax-exempt de minimis fringe benefits if the cost per employee is minimal and the event is infrequent.

Question 18

_____ 12. An employee who receives a nonqualified stock option recognizes income when the option is received and when it is exercised regardless of the strike price.

Accepted Answer

An employee who receives a nonqualified stock option only recognizes income when the option is exercised, not when it is received. The amount recognized as income is the difference between the fair market value at exercise and the strike price.

Question 19

_____ 2. An independent contractor pays self-employment taxes instead of FICA taxes.

Accepted Answer

Independent contractors are responsible for paying self-employment taxes, which include both the employer and employee portions of Social Security and Medicare taxes. They do not pay FICA taxes, as these are typically paid by employees and their employers.

Question 20

_____ 1. Employees are subject to and employers withhold FICA and FUTA taxes.

Accepted Answer

The answer of _____ 1. Employees are subject to and...

Quiz 4: Employee Compensation